SEC wins injunctions against Osaki of Ponzi
Securities and Exchange Commission *SEC
Wednesday March 5 2003 Street Wire
by Brent Mudry
The United States Securities and Exchange Commission, North America's most feared securities regulator, has won permanent injunctions against Larry Osaki of California, the key figure in the alleged $230-million Wallenbrock and Citadel Capital Ponzi scheme. (All figures are in U.S. dollars.) No formal allegations have been made by the SEC against offshore facilitator Michael Ritter, a controversial Edmonton businessman, who heads Newport Pacific Financial Group SA, and who helped out his friend Mr. Osaki last year by sending him $540,000 for legal expenses in the SEC fight.
The SEC announced Monday that it won court orders Feb. 28 in United States District Court for the Central District of California in Los Angeles, permanently enjoining Mr. Osaki, J.T. Wallenbrock & Associates, Citadel Capital Management Group and Van Y. Ichinotsubo. In standard consent settlements, the defendants neither admitted nor denied they ever did anything wrong.
"The court will later determine what amounts defendants should be ordered to pay in disgorgement of ill-gotten gains and civil penalties upon further motion and hearing, where the defendants will be precluded from arguing that they did not violate the federal securities laws," states the SEC. The current court order enjoins the defendants from engaging in fraud or the sale of unregistered securities.
The consent settlements represent the latest setback for Mr. Osaki. The SEC claims that since at least 1999, he and his associates raised at least $230-million from the sale of unregistered three-month promissory notes, which promised a 20-per-cent return every three months, automatically rolled over to maturity, to at least 1,000 investors across the U.S.
The operation, which purported to factor receivables for a Malaysian latex glove makers, is little more than a "massive Ponzi scheme," if the SEC is to be believed. The FBI and the RCMP have been involved in probes of the overall case.
The case also shone an unwelcome light on the world of offshore business dealings, and the affairs of Mr. Ritter and Newport Pacific, who suffered the indignity of being linked to Mr. Osaki by California lawyer James H. Donell, the court-appointed SEC receiver for the Wallenbrock/Citadel group.
"The receiver and the SEC have a strong basis for believing that Village Capital is tied to the defendants through Michael Ritter, chief legal officer officer and CEO of Newport Pacific Financial Group SA, based in Edmonton, Alberta, who provided a declaration to defendants in opposition to the commission's application for the appointment of the receiver," stated Mr. Donnell in his first interim receiver's report, filed last June in federal court in Los Angeles.
Mr. Ritter and Newport fired back last August, launching a $300-million (Canadian) suit in Calgary against Mr. Donnell and the SEC, claiming he was unfairly, improperly and incorrectly smeared by being linked to Mr. Osaki's alleged Ponzi scheme. Neither Mr. Ritter nor Newport have been named as targets in the SEC prosecution of Mr. Osaki and his group.
Mr. Ritter and Newport also filed a $40-million (Canadian) suit in Edmonton against four former employees, blaming his woes on them. An Alberta judge recently ordered the file be unsealed. Mr. Ritter and Newport seized records from his former employees on Oct. 9 under an Anton Piller, or Anton Pillar, order, basically a civil search warrant. The RCMP stepped in to seize these seized records in December.
The SEC moved in to shut down Mr. Osaki's Wallenbrock/Citadel operations on Jan. 29, 2002, abruptly freezing the group's assets. In its complaints, the regulator claims the defendants "secretly engaged in a massive Ponzi scheme," using at least $100-million received from investors to pay off other investors and create an illusion there really was a receivables business.
The SEC also claims at least $130-million of investors' funds was transferred, without their knowledge, from Wallenbrock to Citadel to invest in high-risk fledgling businesses. In addition, "Osaki prepared and maintained 'Larry's Black Books' in which he kept track of these fraudulent uses of the investors' money on a daily basis," states the regulator. The SEC further alleges the defendants forgot to tell investors that Mr. Osaki and Wallenbrock filed for bankruptcy in 1991, that he was convicted of felony grand theft and that investors' funds were deposited into his personal account, shared jointly with his wife and J.T. Wallenbrock.
A receiver's report notes the probe has uncovered a "complicated web" of activities stretching from Pasadena, Calif., to Beijing, Taipei, Hong Kong, Canada and Belize. The receiver's initial probe showed that about $100-million of the funds raised by Wallenbrock was invested by Citadel in 178 fledgling companies, including dot-com promotions, and it appeared that Citadel's payroll was about $500,000 per month just to operate and oversee its embryonic portfolio companies, with such innovative names as 4-Ball LLC, Space4Rent.com LLC, KleenAir, Efoora, RocketPod.com and Epiphany Pictures.
The Osaki scheme hardly lacks colour. A few weeks after the SEC shut down the operation in January, 2002, Min Shi of Beijing, the trustee of the Larry Osaki Trust, stepped forward to claim the trust held a whopping $700-million for distribution to investors. "The Osaki interest in the accounts receivable financing business of the trust is approximately $1-billion U.S.," she stated in an unwitnessed sworn affidavit.
If Ms. Shi is to believed, Mr. Osaki has made an amazing comeback from his days as a convicted felon and a bankrupt. "The (Osaki) Trust is engaged various (sic) business transactions, including the financing of accounts receivable arising from the sale of latex gloves to the food and beverage industry, and the medical industry, in North America, Europe and South America," she states.
Alas, Ms. Shi was reluctant to provide many more details, refusing to answer the receiver's questions. Instead, she claimed that the elusive trust is governed by the laws of the Cook Islands, a popular and secretive offshore haven, and no court anywhere in the U.S. has any jurisdiction over her or the trust.
One of the most intriguing trails in the affair leads to Belize, a popular offshore haven which is not yet a world financial centre.
The receiver claims that Village Capital Trust, which purportedly services Wallenbrock loans, is a peculiar sort of entity. Since the receivership was launched, Village Capital has communicated directly with Wallenbrock investors, "to seek 'transfer' of promissory notes from Wallenbrock to Village Capital," states the court-appointed receiver. "By its own statements, Village Capital was set up to evade the jurisdiction of the SEC and this court," states the receiver.
The receiver, Mr. Donell, is a curious fellow. After tracking down Village Trust to an address in Belize City, he retained a local law firm to check out the address. The response was intriguing.
"We located Lot 7088 Raccoon Street, Belize City, Belize. It is the home of a cab driver named Clarence Pandy and his common-law wife Sharette Trapp. Both Clarence and Sharette work with tourists and they own a small shop in the recently opened Belize Tourist Village, called 'NIA PAN,'" states Wilfred Elrington, a Belizean lawyer, in his May 6 letter.
At first blush, neither the shack nor Raccoon Street seemed to be the kind of places where you would expect to find a key company in a $1-billion business empire. The first time Mr. Elrington dropped by the Village Capital address, only a babysitter was present. The second time, the cabbie's teenage daughter was home.
"The house is located in one of the more depressed areas in Belize City. It is a crude wooden structure that could not have cost more than US$10,000 to construct. I saw no evidence whatsoever of any kind of business being conducted there," states Mr. Elrington. Photos in the court file suggest Mr. Elrington may be somewhat charitable in his description.
The Belizean lawyer had a chat with the cabbie and his wife, who were quite helpful. "They informed me that one of the principals of Village Capital Trust is due to visit Belize within the next 10 days or so. They are aware that Village Capital Trust gives their address as its address but stated that that address is their residence. They live their with their children."
On its own Web site, Village Capital presents a more prosperous picture, and reassures investors that all is fine in Belize. In fact, it pointed out that on Sunday, May 5, the day before Mr. Elrington's Raccoon Street letter, it had actually "officially signed, sealed and delivered" a three-year lease in a "brand new office building." "We were very anxious to secure space in a prestigious area outside of the somewhat depressed downtown region of Belize City," states Village Capital.
Although 10 months have passed since this happy day of May 5, Village Capital still advises investors to send mail to its postbox address, as the worker bees are busy renovating its spiffy new offices. "Please keep monitoring our Web site as we will be posting a picture of our new home within the next couple of days!"
What has Mr. Ritter, the Edmonton offshore facilitator, so hot and bothered, and understandably so, is that the receiver claims the SEC has a "strong basis" for believing that Village Capital is somehow tied to Mr. Osaki through him. Mr. Ritter concedes he is a friend of Mr. Osaki, but he adamantly denies he is involved in anything improper, let alone any kind of massive Ponzi scheme.
The SEC receiver, Mr. Donell, points out that Mr. Ritter's company, Newport Pacific, specializes in forming offshore trusts in Belize, amongst other locations, and he has tracked down Village Capital's Web site to Edmonton, the Canadian city in which Mr. Ritter and Newport are based. This, of course, may be just an innocent coincidence.
Mr. Donell also notes that Mr. Ritter, through Newport Pacific, sent $540,000 to a California law firm for Mr. Osaki's defence. This, of course, may be nothing more than one good friend helping out another in a time of need.
In addition, the receiver claims that "Newport Pacific and Wallenbrock wired millions of dollars back and forth in 2001 and 2002 prior to the (SEC) asset freeze and temporary restraining order." This too, of course, is hardly proof of any wrongdoing.
Hopefully, Mr. Ritter and Newport Pacific will be able to get this dark cloud blown away after they win in court. While several cases are active in various courts, hopefully Mr. Ritter and Newport will be able to convince a judge in Calgary that the SEC and its receiver Mr. Donell have absolutely no foundation to their concerns, and they dragged him and his legitimate business into the Osaki affair in an outrageous blunder. He also hopes to convince an Edmonton judge that he was victimized by his disgruntled former employees.
All of this would be great news for Newport's other current and prospective clients, as nobody likes pesky authorities snooping needlessly around offshore deals. According to Newport's own Web site, it offers a whole slew of corporate and personal services in an amazing gamut of offshore enclaves. Its table of "Our Most Frequently Used International Jurisdictions" includes no less than 49 offshore destinations, ranging from such traditional favourites as Antigua, Belize, the Cook Islands, Costa Rica and Panama to such emerging gems as the Campione Islands, Labuan, Madeira and Hungary.
Newport has already worked impressive wonders for a number of grateful clients, according to case studies on its Web site. It helped one client, with a fleet of 25 small charter planes for sightseeing excursions in the U.S., set up a parallel fleet of five offshore companies in Vanuatu. Each plane was registered to each of five share classes per company, with no cross liability. "The company was able to continue its business confident that an incident (presumably a crash) with one plane would not jeopardize the entire company," states Newport.
For another client, an electronics company, Newport helped set up a Belize-resident Cook Islands trust, a Belize-resident international corporation hosting a Web site in Nevis, and a private bank account in Europe to funnel profits, in an innovative bid to frustrate the IRS and tax men anywhere else.
bmudry@stockwatch.com
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